Iran: Divisions Hinder Economic Recovery

Victories by reformers in Iran's recent legislative elections could afford new opportunities to reform the country's ailing economy. But as RFE/RL correspondent Charles Recknagel reports in the first of a two-part series on economic reform in Iran, reformers first must overcome serious divisions among themselves.

Prague, 6 April 2000 (RFE/RL) -- Since the election of Iranian President Mohammed Khatami three years ago, most of the attention on changes in Iran has been focused on liberals' efforts to win greater social freedoms.

Now, in the wake of a sweeping victory by reformists in parliamentary elections two months ago, many analysts expect the battleground between liberals and conservatives to also increasingly include the economy.

The reason: making progress toward greater social freedoms also requires giving Iranians the economic opportunity to enjoy them. And today, with both unemployment and inflation at double-digit levels, such economic opportunities are severely limited.

In the two decades since its founding, the Islamic Republic's state-dominated economy has given priority to maintaining populist welfare programs and state subsidies for large enterprises. The cost has been low economic growth, poor productivity, and an inability to generate enough new jobs.

But tinkering with the economy poses tough political challenges that promise to make reforming it at least as difficult as liberalizing the social system.

Jahangir Amuzegar, an economics consultant in Washington, D.C., says that the new reform-led parliament has a chance to move ahead on some urgently needed reforms. But to do so, Amuzegar says, the reformers must first overcome serious divisions among themselves.

"The reformists have a numerical majority in the parliament, but not an ideological majority. There is a tremendous gap between them in terms of ideology. The reformists are composed of 18 different factions, each one of these factions has its own political and economic agendas."

Underlying the divisions are the enormous vested interests that cut across all levels of society, a legacy of the Islamic Revolution's experiment in building a paternalistic welfare state. Reformists and conservatives alike disagree within their own ranks over what kind of new economic policy they can support, as change will inevitably bring major cutbacks and sacrifices in the near term.

Analysts say both the conservative far-right and the liberal far-left share a particular aversion to reform. The conservatives because they want to preserve the revolution, and the liberals because they champion social-justice issues. Between them lie the pragmatists of the center, who accept in varying degrees that changes must take place.

So far, the variety of attitudes has translated into little progress for the government's own repeated initiatives to try to spark an economic recovery.

The government's goals were most recently stated in the Third Development Plan, to run from 2000 to 2005, which went into effect with the start of the new Iranian fiscal year last month. The plan calls for increasing productivity by reducing the state's involvement in the economy, and for encouraging competition by eliminating private monopolies. It calls for boosting growth by providing incentives for private investment and creating a more effective tax system. And it calls for moving Iran from its almost total dependence on volatile oil revenues -- which account for some 80 percent of the country's foreign currency earnings -- by also encouraging non-oil exports.

But as the third five-year plan begins, the goals remain largely a wish list, and Iran's economy continues to stagnate. Analyst Amuzegar says the economy is characterized by a combination of no growth, high unemployment and inflation, depreciating currency, an external payments deficit, and little investor confidence.

State subsidies have been increased in some cases, and privatization remains largely on paper. He also says that no dents have been made in the power of Iran's unique system of quasi-state conglomerates, known as bonyads, which are monopolistic, inefficient, and control some 25 percent of the gross national product.

Amuzegar says progress could now be made if the reformist-led parliament, or majlis, is willing to extend its definition of change from the social to the economic arena. He says that essential to the effort would be a powerful parliamentary leader and a more cohesive policy by President Mohammed Khatami's cabinet, which in the past has been plagued by its own quarrels over economic strategy. Amuzegar:

"A strong leadership in the majlis will be essential because these various quarreling factions are unruly and somebody will have to put them in their place and run the show. We all have to wait and see who the speaker will be and what kind of standing he will have among the deputies. That's one thing. The other is that Mr. Khatami is now free from conservative influences in the choice of his cabinet, so if he sets up a more cohesive and more literate and more competent [team of] economists in his cabinet, I think a lot can be done."

But so far, the reformists who will control the new parliament when it convenes in about two months only have signaled they will push for social changes -- the arena in which they can most agree. They have yet to show signs they also will move strongly on the far more divisive question of economic issues. Amuzegar says:

"The priority for the new majlis will be in the political, social and cultural areas. They are going to move in the direction of revising the electoral laws, revising the press code, depoliticizing the judiciary, maybe even abolishing some of the special courts, allowing [satellite] television dishes and so forth, but I do not really see any major move, simply because they haven't said anything about it, any major move in the economic field."

Conservatives, too, have been largely silent on economic issues. During the recent parliamentary elections, an alliance of some 12 conservative groups -- many of which in the past have strongly criticized the Khatami administration for ignoring the people's economic hardship -- offered no specific proposals. Instead, they only pointed to the need to solve economic problems which they identified as unemployment and too much bureaucratic red tape.

Meanwhile, Iranians at all levels worry that unless the economy can grow, serious difficulties such as unemployment will increase. The government estimates unemployment at some 14 percent, while independent analysts put the figure much higher. But the prospects for the future are still more worrisome. Some 50 percent of Iran's population is currently below the age of 20, promising a balloon of job-seekers in the coming years.

(The second part of the two-part series on Economic Reform in Iran looks at how the domestic economy needs to change to become more efficient.)